1
PROBLEMS ON INCOME STATEMENT
Q1 The income statement of a company as on 31st Chaitra last year has been given as
under:
Production units
1,200
Sales units
1,000
Sales revenue @ Rs. 12
12,000
Less: Cost of goods sold:
Variable manufacturing cost
4,800
Fixed manufacturing cost
2,400
Cost of production
7,200
Add: Opening stock (200 units)
1,200
8,400
Less: Closing stock (400 units)
2,400
Gross profit before adjustment
6,000
Add: over absorption of fixed manufacturing overheads
400
Gross profit after adjustment (A)
6,400
Less: Non manufacturing cost:
Variable selling and administrative cost
1,000
Fixed selling and administrative cost
1,000
Total (B)
2,000
Net Profit (A–B)
4,400
Required:
(a) Income statement under variable costing
(b) Sales volume required to earn 20% on selling price
(c) Sales volume required to earn after tax profit of Rs. 6000 (corporate tax rate is
20%)
Q2 The XYZ company was organized on January 2, 19×2. The company’s financial
position, prepared at the end of each of its first three years, was as follows:
Particulars
19×2
19×3
19×4
Cash
$
11,00
0
$
6,000
$
20,00
0
Inventories
0
15,000*
5,000+
11,000
21,000
25,000
Capital stock
10,000
10,000
10,000
Retained earnings
1,000
11,000
15,000
11,000
21,000
25,000
* Includes $ 4,000 of fixed overhead
+ Includes $ 1,500 of fixed overhead
Required:
a. What were the reported incomes for 19×2, 19×3, 19×4, assuming that no dividends
were paid?
b. What would the income have been if variable costing had been used instead of
absorption costing for these three years?
Solution
(a) If dividend is not paid, net income
19×2
19×3
19×4
Retained earnings
$ 1,000
$ 10,000
$ 4,000
(b) Calculation of net income under variable costing
19×2
19×3
19×4
Net profit as per absorption costing
$ 1,000
$ 10,000
$
4,000
Less: Fixed manufacturing costs included in closing stock
0
4,000
1,500
1,000
6,000
2,500
Add: Fixed manufacturing cots included in opening stock
0
0
4,000
Net Profit as per variable costing
1,000
6,000
6,500
Q.3 The Quaz Company began operations on January 1, 19×2. Following is a summary of
its operations for the first three years of its existence:
Particulars
19×2
19×3
19×4
Volume in units:
Sales
25,000
30,000
20,000
Production
30,000
35,000
15,000
Selling price per unit
$ 33
$ 33
$ 33
Variable costs per unit:
Selling
$ 4
$ 4
$ 4
Production
$ 12
$ 12
$ 12
Fixed costs per year:
Selling
$ 125,000
$ 125,000
$ 125,000
Production
$ 225,000
$ 225,000
$ 225,000
Fixed overhead is applied under the absorption costing method, based on a normal volume
of 25000 units per year:
Required:
a. Compute the income in each of the three years under absorption costing and then under
variable costing. (The company uses FIFO).
b. Explain the differences in reported income in each year and for the three year period.
c. Which costing method do you believe has been prepared for use in the company’s
Sales volume
$ 800,000
Manufacturing costs:
Variable
Selling and other expenses:
Variable
completed
Sales
